Mauritius: The Setting Up Of A Trust - Key Considerations

Summary

Quite often, a trust is chosen as a structure to manage the business and/or family assets of a client. The reasons vary according to clients’ requirements. This article clarifies the various issues, which an individual should consider when setting up a Trust.

Indeed, it is important to consider the pertinent issues, some of which are quite obvious. The reasons are that, at the outset, the individual should be aware of the consequences of making a wrong choice or decision and also of the need to address matters with certainty and most importantly in a cost effective manner.

Perhaps, the first important issue to determine when setting up a Trust is to assess whether a Trust is required at all. There are situations where people want to form a Trust for reasons which are not clear or that they are manoevering under misunderstanding or under wrong advice. Perhaps, the same objective which the individual wishes to achieve can simply be attained by using a company, by a partnership, by a ‘société’ or in an individual capacity as a sole trader.

The first thing one should bear in mind is the implication of setting up a Trust. The implication is quite important, as when one is settling one’s property in a Trust, one is in fact parting with the legal ownership of the assets and that the legal ownership of the assets is transferred with the trustee. Thus, the control of the assets lies with the trustee and the settlor cannot interfere with the assets or encroach upon the duties of the trustee in line with the principle "donner et retenir ne vaut rien". An interference into the trustees administration can result into the Trust being a sham and the Trust being unenforceable.

On the other hand, the trustee is the legal owner of the assets and he holds them for the equitable benefit of the beneficiaries. The settlor also has to bear in mind that in his capacity as settlor, he will not be able to enforce the Trust and that this right to enforce the Trust will reside with the beneficiaries of which he may be one of them, but in the event that he is not a beneficiary he will not be able to enforce any action against the trustee.

It is also important when setting up a trust to ensure that the three certainties are present, namely:

1. Certainty of intention
2. Certainty of the subject matter
3. Certainty of the beneficiaries

For a Trust to be valid, it is crucial that the settlor indicates in a clear manner his intention to form a Trust and his intention to part with his assets. Failure to show intention and the transfer action can result into an invalid or unenforceable trust.

Secondly, it is important that the assets, which are to be managed by the trustee, are clearly identified or are identifiable. Finally it is important that the persons who are to be the beneficiaries under the Trust are named and identified properly to ensure a smooth administration of the affairs of the Trust by the trustee.

The nature of a trust is such that, the trustee has an onerous duty to carry out "vis-à-vis" the beneficiaries and it goes without saying that the trustee should be a person or a corporate employing quality professionals, people of integrity, credibility and capable of delivering a quality service. Thus, the choice of an appropriate trustee is of significant importance. The corporate trustee should be chosen on the basis of its reputation, capability and the professionals it employs.

In the first instance, the settlor may have comfort in choosing a trustee of repute but yet the person who has vested invaluable assets into a Trust, may have apprehension about the security of the assets. Thus, it is important to choose a trustee with a strong reputation on the market. The need to appoint a protector could also arise in the circumstances and this is dealt with hereunder.

Another important matter in choosing a trustee is to ensure that the trustee does not outsource the administration of the Trust to another jurisdiction because of lack of adequate staff or simply because it wishes to optimise its profits by delegating part of the work with a less costly service provider in another jurisdiction. One of the impacts of this sort of outsourcing can be the dilution of confidentiality. Supplying all the confidential information to another service provider in another jurisdiction may dilute the privacy and confidentiality of information.

In Mauritius, Section 24 of the Trust Act 2001 provides for the appointment of a protector. The protector has the duty to supervise the trustee who has to exercise his powers according to the provisions of the trust deed. The trustee may have to seek the consent of the protector to effect any action which the trust deed will so require from him. The protector has also power under the Trust Act to revoke the trustee and to appoint another trustee in replacement. This appointment can bring comfort to the settlor. However, though Section 24 (5) of the Trust Act allows a settlor to be a protector, it is submitted that such a practice should be looked at carefully, otherwise this can be interpreted as an interference with the powers of the trustee and render the trust a SHAM under the principle of "donner et retenir ne vaut rien", see also Chase Manhattan Bank Plc v Rahman.

The choice of a jurisdiction where a trust is to be set up is driven by several factors which can be explored through the following questions:

1. Is the jurisdiction a reputable and reliable one?
2. Quality service at a reasonable cost.
3. Does the jurisdiction have a proper Trust Legislation in line with the Hague Convention?
4. Does the jurisdiction have relevant provisions dealing with unenforceability of forced heirship rules on transfers of assets to the Trust?
5. Does the jurisdiction have provisions for the appointment of protectors?
6. The lifetime of a Trust.
7. Does the trust has a possibility for migration of the trusts out of the jurisdiction?
8. Is that trust liable to pay any tax in the jurisdiction?
9. Competent courts of law to dispense justice in equity matters.
10. Taxation - Is the jurisdiction a low tax jurisdiction?
11. Confidentiality.

The above are some of the essential questions one should consider when choosing where a Trust should be formed.

Another important issue in considering the setting up of a Trust, is, the type of trust the settlor will want to hold.

1. Fixed Trust
2. Discretionary trust
3. Purpose trust
4. Charitable trust
5. Asset Protection Trust

There are other types of trusts, e.g. - Resulting Trust, Constructive Trust and Bare Trust, but at this juncture these are perhaps not relevant here. The Trusts as listed above would have specific provisions in the Trust Deed.

The Trustee should normally follow the provisions set out in the Trust Deed. It is important that the term of the Trust Deed is properly worked out and that a provision is included as regards the remuneration of the Trustee. An absence of such a provision can result into a situation where the Trustee will not be entitled to any fees and yet to carry out the duties!!

The idea of considering a jurisdiction which has a network of tax treaties with different states is a worthwhile exercise. Mauritius trusts, for example, have the advantage of being tax resident in the country and furthermore has the possibility of securing a global business licence.

This can enable the trust access to benefits under any of the 32 treaties which Mauritius has with the other states. Very often it can result into an elimination of capital gains tax and into a low tax in income due to claims available for relief. But no doubt, this area is quite technical and it is submitted that professional advice should be sought in line with the specific project requirements.

This article highlights the pertinent issues one has to consider in setting up a trust. They are considered from a very practical perspective. The issues dealt with are not exhaustive and there can certainly be other issues or considerations. Any structure which is put in place involves a cost and very often these can be costly especially when one has to provide for professional fees, registration fees, transfer fees and stamp duty fees. Thus it is highly important to assess whether a trust structure is appropriate, that the trust is enforceable and that it is set up in the right jurisdiction with the right trustees.